Umair Haque writes:
– the Geithner plan is morally bankrupt, economically toxic, and ethically questionable.
1) Banks are already gaming the plan.
2) Why? Because Geithner has just written a put option.
3) Using your money.
4) Will the government sell you a put option? Nope, you’re not rich enough. Only hedge funds are eligible. It is a transfer of wealth from you…to the guys that need it least.
5) That’s not economic democracy. It’s economic feudalism: the heart of a new cold war.
Sound harsh? Joe Stiglitz, one of my idols, is even more direct: he calls it robbery.
6) How did the robbery go down? Wasn’t the plan cooked up by Nobel-prize winning economists, IMF dudes, civil servants, Tim Geithner, Barack Obama, and other relatively impartial folks?
Not a chance: The Geithner plan was designed by the world’s most important banker, the world’s most powerful equity investor, and the world’s biggest bond investor.
If you think what I’m writing sounds like sci-fi, try that on for size. Whose idea was the “government” bailout plan? Why, it was the idea of the three most significant players in the financial markets.
Robbery, indeed. If you’re under the age of 30, your future just got mortgaged.
Like I said before, it is a weapon of economic, political, and social mass destruction. The outlines of that should be much clearer now — just three days in, the cure is already promising to be worse than the disease.
It is economics 1.0: two step backward, instead of one step forward.”
7) Barack Obama let this go down, and his political capital will be sapped by it. Rightly so, because it’s poor management, and terrible leadership.
The day before, Umair explained that:
“The Geithner plan is a financial coup d’etat. The Geithner plan is the most radical — and radically toxic — cure for a financial disease in recent history. From an organizational point of view, it is nothing short of revolution: a financial coup d’etat. Yesterday, public expenditure and private investment were kept vastly separate — because of their vastly differing goals and incentives. The Geithner plan merges them, creating an entirely new kind of financial economy altogether.
Welcome to Looting 2.0. What does that financial system look like? In it, everything is a hedge fund. The Geithner economy is Milton Friedman’s revenge from beyond the grave: it is one that puts the allocation of public resources in a very small number of almost totally hidden private hands. The Geithnerconomy is a kind of financial Frankenstein: run by hedge funds, leveraged by the public, whose interests overlap by only 20%. The problem of toxic incentives hasn’t gone away: in fact, the Geithner plan institutionalizes and explodes it, like a biological weapon infecting an entire country.
What do these payoffs create the incentive for? For hedge funds to loot the public on a mega-scale. Heads, funds win. Tails, you lose.
Wait — hasn’t it always been so? Not a chance. Never before in financial history has so much money been in the hands of so few, with so little transparency, and such clearly toxic incentives. Never before in financial history has the richest country in the world actively, irreversibly, and so radically merged public expenditure with private investment.
The financial coup d’etat lays the seeds of a Great Divergence. Last week, I discussed how the AIG bailout was the most pernicious kind of cronyism — not even crony capitalism, but crony socialism. When we zoom out, that’s exactly what the curiously lopsided payoffs hedge funds get are. How would you like it if Geithner offered you or your company the opportunity to invest at the same risk/return profile? Of course, you won’t get the chance.
What was, with the AIG bailout, a mere crack in the economic firmament is now a gaping fissure. The result of the financial coup d’etat is a Great Divergence: we have two economies running in parallel: capitalism for the poor, and socialism for the rich. The former essentially subsidizes the latter endlessly and perpetually.”
Douglas Rushkoff offers a more nuanced assessment, based on the ‘good’ and ‘bad’ aspects of the plan:
“The underlying problem with the toxic assets currently on the books of most banks is that no one knows quite how to value them. (Their market value is very low right now – lower than most believe it should be. This is what is meant by “mark to market.” In time, when things are better and the world is generally less risk-averse, they should be worth more. Most banks need their balance sheets to look better now, and they can’t while they have these – perhaps artificially – deflated securities on their books).
Were the government to simply go in and buy them all, the Treasury Department would have to hire a huge staff of accountants to look at each and every toxic asset – every single loan package and bond and bond fund, and come up with what it is worth. If that were even possible.
While this would give government all the winnings if and when the securities become worth what they are really worth, they would be saddled with a huge actuarial task, and would surely arrive at numbers that banks feel are unfairly underestimating the securities’ true worth.
Geitner’s plan is less about spreading risk than it is about finding a more efficient way to evaluate all those issues. So why not crowd source?
The government assumes a hunk of the risk – the hunk that no one else wants to assume – while letting a huge army of investors bid and fight over the profit potential. His hope is that those people will do the necessary homework on all this stuff, since it is some real money they are staking.
Thus, Obama’s team comes up with entrepreneurial socialism, or market-based welfare. The scores of investors bidding on all these securities become a giant unpaid (but insured) bunch of bidders.
That’s the brilliant part.
The stupid part is that it’s not a real marketplace, so the invisible hand of collective market genius just won’t take effect. While the market may, in the best of circumstances, have some of the self-regulatory features of nature, we can’t expect it to act like nature when so many of the underlying rules have been rigged. Auction-determined prices will not reflect underlying value when some large percent of risk has been removed. And the percentage of risk assumed by government remains the same, regardless of the riskiness of the toxic asset. So, playing the game properly, investors should go for the highest odds instead of the lowest.”